HNA: Grey Rhino topples
into bankruptcy Jan/Feb 2021

Hainan Airlines Group is on the brink of bankruptcy, having accumulated an estimated $10bn loss for 2020. And this situation is not the fault of Covid-19.

Founded in 1993 as one of China’s first “privately-owned” airlines (albeit with the help and support of the Hainan Provincial Government), Hainan Airlines had grown at a phenomenal rate. By the end of 2019 the group had a 16% share of the Chinese airlines' market — just behind China Eastern — having grown at an annual average rate of 16% a year over the previous decade, well above the market growth of 9% a year. A Skytrax 5-star airline, it was starting to look as if it might be a real challenger to the “Big 3” state-owned carriers — Air China, China Southern and China Eastern.

Hainan Airlines itself had a fleet of 220 aircraft as of the beginning of this year. Its main base is at Haikou on Hainan island and has hubs in Beijing and Xi’an and a strong presence in Shenzhen and Guangzhou, serving pre-pandemic 340 domestic routes between 69 cities in mainland China and internationally operating 77 routes to 50 destinations in 24 countries worldwide. It has a large number of subsidiary and associate airlines including Beijing Capital Airlines, Tianjin Airlines, Urumqi Airlines, Lucky Air and China West Air which add another 340 domestic routes and 80 domestic destinations to the group network along with 46 international routes to 16 destinations in another 7 countries. In total the group has a fleet of 592 aircraft (see fleet profile).

In the early 2000s the founders, Chen Feng and Wang Jian, established HNA Group, in the wake of the SARS crisis. It acted as a holding company for Hainan Airlines and as a vehicle for expansion into airports (with a sizeable stake in its home base airport of Hainan Meilan) and related travel and tourism based businesses. This was just at the start of China’s “Going Out” strategy designed to encourage outward direct foreign investment and a precursor to the country’s quasi-imperialist “One Belt One Road” initiative.

In the early part of the 2010s the HNA Group followed the investment strategy to an astonishing degree, acquiring stakes in airlines (Ghana World Airways, Aigle Azur, South Africa’s Comair, Azul, TAP Air Portugal, Virgin Australia), hotels (taking a 29% stake in Spain’s NH Hoteles in 2014 and 25% of Hilton Worldwide in 2017), aircraft leasing (Australian Allco in 2010 and Avolon, for $2.5bn, in 2015, which then was used to buy CIT Group’s aviation leasing unit for $10bn in 2016), airports (Frankfurt Hahn and Rio de Janeiro), handling (Swissport, CHF2.8bn 2015), catering (Gategroup, CHF1.5bn 2016), travel retail (20% of Dufry, $1bn 2017) container and trailer leasing operations in the US, Caribbean and the Netherlands; and logistics with a $6bn acquisition of US-based IT distributor Ingram Micro in 2016. It also moved into real estate (buying the Reuters HQ office building in London’s Canary Wharf for c$280m) and banking (snapping up a 10% stake in Deutsche Bank in 2017). It announced an ambition of establishing its own global investment bank.

By 2016 HNA Group had entered the Fortune 500 global list of companies (at number 464) and anticipated being in the top 100 by 2020 and the top 50 by 2030. Its acquisition spree peaked in 2016 with over $30bn spent: in that year it was the largest Chinese outward direct foreign investor accounting for over 12.5% of total. That year also saw the Chinese authorities start to worry about the consequences of unconstrained debt-fuelled M&A activity, and the PRC started to put brakes on the availability of cheap loans from state-controlled banks. The Group went on to spend a further $15bn in 2017, albeit on deals below the $1bn mark supposedly in the attempt to keep its head below the parapet of scrutiny.

But some of its acquisitions — particularly those of its stake in Deutsche Bank and takeover of Swissport and Gategroup — raised regulatory concerns over HNA Group’s ownership structure and the quality of its probity as an acquiror.

As a private conglomerate it was not particularly open to publishing detailed information and its structure is particularly opaque. The organogram below goes some way to attempt to present the interwoven connections and cross-holdings within the aviation interests of HNA Group (updated from our analysis in Aviation Strategy, March 2016, although we have been unable to verify changes in shareholdings that resulted from an internal restructuring that took place in 2018).

Liquidity concerns first appeared early in 2018, and the group pushed through restructurings at some of its quoted vehicles: Bohai Leasing and Hainan Airlines had share trading suspended for much of 2018 as the group tried to shore up its liquidity through financial juggling (see charts). The airline group reported a hefty full year operating loss of CNY12.5bn (US$1.9bn).

And then in late 2018, founder Wang Jian fell to his death from a wall while on holiday in the south of France.

Since then, apparently with oversight from state-owned banks and the Hainan provincial government, the group has been disposing of its overseas investments — at least where it could; Aigle Azur and Virgin Australia both succumbed to insolvency.

Liquidity problems intensified. In September 2020 a court in Xi’an declared HNA Group and co-founder Chen Feng laolai (which may translate as “discredited” or “deadbeat”) for the failure one of the group companies to pay a court-mandated debt of a mere $5,500; the court granted Chen Feng full state opprobrium by placing him on the social blacklist — banning him from spending on “luxuries” (including travel by air, high speed train, taking holidays, staying at star-rated hotels, playing golf or sending his children to private schools).

At the end of January 2021, a local court in Haikou received a petition requesting the group be placed in bankruptcy and restructured. A couple of days later, three of the group’s listed companies, Hainan Airlines Group, HNA Infrastructure and Shenzhen-listed retailer CCOOP Group announced that CNY61.5bn (nearly $10bn) had been “embezzled by shareholders and other related parties” and that they and their subsidiaries had provided non-compliant guarantees for another CNY46.5bn.

Hainan Airlines subsequently stated that it might have to report a full year loss for 2020 approaching the equivalent of $10bn — mostly from asset impairment charges than the effects of the coronavirus pandemic. This will more than wipe out shareholders' funds, it stated, and as a result its shares are to be delisted when the annual accounts are published. Within a few days, creditors had requested bankruptcy proceedings against six of Hainan Airlines Group’s regional carriers: Air Changan, Fuzhou Airlines, Grand China Air, GX Airlines, Lucky Air and Urumqi.

According to an article in Chinese financial magazine Caixin, the government-appointed team working at HNA Group expects that at least 500 of HNA Group’s 2,300 companies will end up in bankruptcy restructuring.

A grey rhino

HNA Group was a massive “Grey Rhino” — a metaphor for something large and obvious charging to a disastrous end which you tend to ignore, a term coined by the US policy analyst Michele Wucher, roughly the opposite of the unforeseeable Black Swan

Its failure is undoubtedly a deep embarassment, especially for the Hainan Provincial Government, for whom the original core of HNA — the airline and airport — is strategically important. This is particularly pertinent as the island of Hainan is moving towards becoming a free trade port. The master plan to make the region China’s largest free trade area was published in June 2020 and drafted into law at the beginning of 2021. It initially targets certain preferred industries with a second phase from 2025 allowing all goods (not on a restricted list) to be tariff free.

With this end in view, there was a rather complex restructuring of the relationship between Hainan Meilan Airport and listed HNA Infrastructure in 2020 which saw a transfer of airport assets and change of shareholding. Among other things, one result was a five-fold increase in the share price.

Reports suggest that the Hainan government is eager for Hainan Airlines to remain independent, with Reuters reporting that it is seen by the Hainan authorities as being attractive to new investors. The intention apparently is for airline management to spend this year negotiating to bring in strategic investors.